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Mortgage Pre-Approvals: Do You Need One?

 

There’s a common misconception among many homebuyers that if you are pre-approved for a mortgage, your mortgage is basically guaranteed. 

But this isn’t the case. Having a pre-approval doesn’t mean the lender will fund your mortgage.  What is really means is that the interest rate has been held for you for a specific period of time - and that I, your mortgage broker, have reviewed your documents.

Below, we’ll explain what a mortgage pre-approval is and whether it’s worth getting one.  In a nutshell - it is.

A mortgage pre-approval is a conditional approval granted by a lender based on a preliminary review of your financial situation and creditworthiness. While this preliminary approval usually requires a credit check, information about your debts and income are based on details you provide to your broker, which are then shared with the lender. A pre-approval is often based on that information alone, the lender does not verify any documents and does not know anything about the property you are planning to buy.  For example, you may be the ideal client, great credit, income etc but if you are looking to buy a run down shack in the middle of nowhere with no heat or water or road access - you probably will have a hard time getting a mortgage!

For these reasons, a pre-approval isn’t binding until a lender has a chance to do its own review of not only you and your financial situation, but also review details of the property you plan to purchase.  This may include requiring an appraisal and/or inspection. Of course, as your broker, I can give you a much better understanding of what will and won’t be accepted.

Pros and cons of a pre-approval

  • Pro: They let you know roughly how much you can qualify for based on the preliminary financial information you provide to your broker (me). 
  • Con: Not all lenders offer pre-approvals, which could limit rate options somewhat for those wanting a pre-approval.
  • Pro: The process is generally quick and can often be performed online.  
  • Con: Some pre-approvals can come at a cost, potentially adding anywhere from 15 to 25 bps to your rate. Lenders that offer pre-approvals are hedging their offers and must honour the rate they quote if they go forward with funding the mortgage. This can result in potentially higher funding costs, which is why many rates with pre-approvals are priced at a slight premium.   
  • Pro: Peace of mind while house-hunting. Having a pre-approval in hand can give you and your realtor greater confidence when shopping for your house, as you can set an appropriate budget based on the mortgage you can qualify for.  Sellers also like to know you have spoken to a broker so you know that the house you are about to put an offer on, is within your budget.
  • Pro: Lock in a rate. If you’re concerned about mortgage rates rising during the home-buying process, getting a pre-approval is a good way to lock in a rate, which lenders will typically hold for up to 90 or 120 days. 

Should you get a pre-approval? (In my opinion YES)

Pre-approvals are often a good starting point when shopping for a mortgage. Let’s talk about your unique situation and whether a pre-approval is right for you. 

Call me today! It's just a conversation.

Cathy McMurrich
(403) 660-1169
cathy@mortgagesbycathy.ca

 

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